(New throughout, adds details and more comments)
By Marcela Ayres
BRASILIA, May 19 (Reuters) - Brazil will finance emergency crisis-fighting spending by selling debt of up to three years maturity, beyond which borrowing costs start to get very high, Treasury Secretary Mansueto Almeida said on Tuesday.
Speaking in an online event hosted by the France-Brazil Chamber of Commerce, Almeida said the economy could shrink this year by more than 5%, and that the budget deficit could exceed 9% of gross domestic product.
The economic crisis caused by the COVOID-19 pandemic will trigger massive increases in government spending and borrowing, with the deficit excluding interest payments likely to reach 700 billion reais ($122 billion) this year and top 200 billion reais next year, Almeida said.
Borrowing at the long end of the bond market is unfeasible, he said, noting that even with yields at 8% or 9% on 10-year bonds, there little investor demand. Borrowing costs on bonds beyond three years’ maturity start to get expensive, he said.
“Traditionally, buyers of long bonds - 10 years in Brazil is a long bond - are foreign investor and pension funds. Even before the crisis, they were already largely absent from the market,” he said.
Almeida said the government may borrow overseas, either in U.S. dollars or euros. Foreign bond markets are open for a country like Brazil, and the current spread to borrow in dollars is “inviting”, Almeida said.
Almeida again insisted that Brazil must return to its fiscal austerity, pro-market, and economic reform agenda as soon as the worst of the health crisis passes. That will reassure financial markets and kickstart the economic recovery, he said.
While Brazil’s debt is on track to approach 90% of GDP this year, it is its trajectory rather than level that is most important, Almeida said.
Reporting by Marcela Ayres Writing by Jamie McGeever; Editing by Sandra Maler and David Gregorio